CarbonProofing Central Government DecisionMaking in Ireland

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Carbon-Proofing Central Government
Decision-Making in Ireland

• Shirley Kilcullen
• Comhar SDC DIT

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Presentation Overview

• Project Research Question, Objective and
  Programme
• Purpose of Workshop
• Context and Definitions
• Factoring Carbon into Cost Benefit Analysis
  (CBA) Basic Steps
• Current Practice in Ireland
• Key Issues (incl. commentary on EVIA study, GWP
  conversion rates, price, discount rate and
  appraisal period)
• Conclusions to date
• Next Steps

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The Project

• Research Question How should Central Government
  Decision-Making in Ireland be adjusted to take
  the cost of climate change into account?
• Objective - To develop a methodology to include
  the cost of carbon in Central Government
  Decision-Making in Ireland (in IA CBA)

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Project Programme
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Purpose of Workshop

• To examine critical issues for inclusion of
  carbon in project appraisal, against the backdrop
  of current practice in the UK and other
  countries and
• To identify research (currently
  underway/completed) which is likely to be of
  value to the Department of Finance
  Interdepartmental Committee

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Workshop Timetable

• 09.30 Welcome - Frank Convery
• 09.35 Introduction and Background - Shirley
  Kilcullen
• 10.00 The Evolution of Carbon Pricing for Cost
  Benefit Analysis in the UK and Its Practical
  Application - Paul Watkiss
• 10.40 Questions and Answers
• 11.00 Coffee
• 11.20 Group Discussion
• 12.00 Group Feedback
• 12.20 Conclusion and Next Steps
• 12.30 Workshop Close

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The Context Irish targets

• Kyoto 1990 13 63Mt CO2e
• Actual 2006 1990 26 70Mt CO2e
• New EU 2020 limit 2005 20 56Mt CO2e
• 2007 NCCS Flexible mechanisms will bridge the
  gap at a budgeted cost of 270m, based on
  distance from Kyoto

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Some Definitions

• Impact Assessment formal analysis of the likely
  effects of a proposed policy, initiated or
  coordinated by government administrations prior
  to its adoption
• Cost Benefit Analysis - a conceptual framework
  applied to any systematic, quantitative appraisal
  of a public or private project to determine
  whether, or to what extent, that project is
  worthwhile from a public or social perspective.
  It differs from a straightforward financial
  appraisal in that it considers all gains
  (benefits) and losses (costs) regardless of to
  whom they accrue

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Factoring Carbon into CBA Basic Steps

• Define the proposed project/policy
• Decide what greenhouse gas (GHG) emissions to
  include
• Quantify the annual incremental GHGs
  abated/emitted
• Apply the relevant Global Warming Potential
  (GWP) factors to convert all emissions to
  tonnes of CO2 equivalent
• Multiply each years tonnes of CO2 equivalent
  abated/emitted by an appropriate price, for a
  defined timeframe
• Applying a discount rate, calculate the Net
  Present Value (NPV) of total emissions
  abated/emitted and
• Include this NPV in the overall CBA for the
  project/policy

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Current Practice in Ireland

• Proposed Working Rules for CBA, CSF Evaluation
  Unit, June 1999
• Only externalities representing a significant
  project outcome should be included
• Price use shadow price where market price
  doesnt reasonably reflect opportunity cost
• Discount Rate 5
• Appraisal Period 20 years for infrastructure
  projects, 10 years for others
• RIA Guidance 2005 no practical guidance is
  given on how to factor climate change into the
  evaluation process
• DoF Guidelines for the Appraisal Management of
  Capital Expenditure Proposals in the Public
  Sector 2005 defines appraisal techniques
  relative to capital investment levels

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Current Practice in Ireland contd. DoF
Guidelines
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Current Practice in Ireland contd.

• Proposed Working Rules for CBA, CSF Evaluation
  Unit, June 1999
• Only externalities representing a significant
  project outcome should be included
• Price use shadow price where market price
  doesnt reasonably reflect opportunity cost
• Discount Rate 5
• Appraisal Period 20 years for infrastructure
  projects, 10 years for others
• RIA Guidance 2005 no practical guidance is
  given on how to factor climate change into the
  evaluation process
• DoF Guidelines for the Appraisal Management of
  Capital Expenditure Proposals in the Public
  Sector 2005 defines appraisal techniques
  relative to capital investment levels
• Forfás - EU ETS predicted future pricing
• Department of Transport 2007 - 61 per t/CO2e

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Key Issue I Evaluating Integrated Impact
Assessment (EVIA)

• Across the EU, in the context of integrating
  sustainable development into the IA process,
  direct economic effects were assessed in 85 of
  cases, with social and environmental impacts
  assessed in only 53 of cases
• limited quantification is not just due to a
  lack of expertise and resources, but is also
  linked to reservations of government officials
  about quantification and monetisation
• Only 52 of respondents agreed that
  quantification and monetisation generally
  increased the usefulness of the IA process

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Key Issue II Global Warming Potential (GWP)
Conversion Factors

• It is recognised that there are a growing
  number of academic papers that argue that the GWP
  is numerically and conceptually wrong
• the GWP assumes that future concentrations are
  equal to todays concentrations
• GWPs of many GHGs have changed over the last
  number of years, per the IPCCs Assessment
  Reports (e.g. that of Methane)
• Kyoto Protocol recognises the 100-year GWPs as
  reported in the IPCCs Second Assessment Report
  of 1995

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Key Issue III Price

• Numerous measures of carbon cost
• Social Cost of Carbon (SCC) - a measure of the
  total damage from now into the indefinite future
  of emitting an extra unit of GHGs now
• Marginal Abatement Cost (MAC) - a measure of
  effort or the cost of emissions reduction
• Shadow Price of Carbon (SPC) a form of SCC,
  adjusted to reflect estimates of the MAC and
  other factors such as political desire to show
  leadership in tackling climate change
• Study of EU25 Switzerland 9 countries include
  carbon in a monetised form in CBA, 3 using damage
  cost approach/SCC, 4 using avoidance costs/MAC, 2
  using other measures

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Key Issue III Price contd.

1 Assuming 26-32 emissions reduction by 2020
and 60 emissions by 2050 based on 1990 levels
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Key Issue III Price contd. Global MAC
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Key Issue III Price contd. UK MAC
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Key Issue IV Discount Rate Appraisal Period

• Irreversible and non-substitutable nature of
  climate change damage valid reason to use a low
  discount rate?
• social rate of discount of 4-5 is close to
  what most western governments use for most long
  term investments
• Re carbon, it is recognised that even lower
  discount rates may be morally preferable, but are
  clearly out of line with common practice
• Stern advises that a single constant discount
  rate would generally be unacceptable for dealing
  with the long-run, global, non-marginal impacts
  of climate change

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Key Issue IV Discount Rate Appraisal Period
contd.
Declining Long Term Discount Rate per HM
Treasury, UK

BUT DEFRA recommend the utilisation of a flat
discount rate of 3.5
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Key Issue IV Discount Rate Appraisal Period
contd.

Effect of discount rate on present value of
damages worth 1 million ECU at the time (from 1
to 100 years in the future) damage is incurred

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Key Issue IV Discount Rate Appraisal Period
contd.


Consequences of Using Different Discount Rates
for Analysis of Long Term Future Damage
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Key Issue IV Discount Rate Appraisal Period
contd.


Discount Rate and Appraisal Period
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Conclusions to date

• Consistency - Forfás (using EU ETS predicted
  future pricing) DoT (_at_ 61 per t/CO2e) have
  taken steps to include carbon in their CBA, while
  others refer to CSF Evaluation Units Proposed
  Working Rules for CBA, June 1999
• GWP - 100-year GWPs as reported in the IPCCs
  Second Assessment Report of 1995
• Price - Use avoidance costs (MAC) in short term
  damage cost (SPC) in long term?
• Discount rate - 5 too high for carbon
• Appraisal period - 20 years for infrastructure
  projects and 10 years for all others - too short

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Next Steps

• Should all GHGs and other emissions be included
  in the CBA process?
• In most EU countries carbon prices for CBA are
  constant - is this acceptable?
• Circulate draft guidelines by end August 2008 for
  review and comment
• Finalise guidelines by end September 2008
• Carry out ex-post CBA of an infrastructure
  project in Ireland using the proposed methodology

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Presentation Review

• Project Research Question, Objective and
  Programme
• Context and Definitions
• Purpose of Workshop
• Factoring Carbon into Cost Benefit Analysis
  (CBA) Basic Steps
• Current Practice in Ireland
• Key Issues (incl. commentary on EVIA study, GWP
  conversion rates, price, discount rate and
  appraisal period)
• Conclusions to date
• Next Steps